Argentina Loses U.S. Appeal of Ruling on Defaulted Bonds

By Bob Van Voris -
Oct 26, 2012

Argentina can’t make payments on
restructured sovereign debt while refusing to pay holders of its
defaulted bonds, a U.S. appeals court ruled in a victory for
creditors including Elliott Management Corp.’s NML Capital Fund.

Argentine bonds sank the most in four months on the ruling.
The U.S. Court of Appeals in New York today upheld lower-court
decisions, which may help creditors who rejected the country’s
restructuring offers collect $1.4 billion in defaulted debt.

“We hold that an equal treatment provision in the bonds
bars Argentina from discriminating against plaintiffs’ bonds in
favor of bonds issued in connection with the restructurings and
that Argentina violated that provision by ranking its payment
obligations on the defaulted debt below its obligations to the
holders of its restructured debt,” U.S. Circuit Judge
Barrington Parker said in the opinion.

The appeals court, which upheld orders issued by U.S.
District Judge Thomas Griesa in Manhattan, rejected Argentina’s
claims that the move would undermine its debt agreements,
trigger a new financial crisis in the republic and make it
impossible for countries including Greece, Spain and Portugal,
to restructure their debt in the future. Argentina defaulted on
more than $80 billion in foreign bonds in 2001.

‘Blanket Assertion’

“Nothing in the record supports Argentina’s blanket
assertion that the injunctions will ‘plunge the Republic into a
new financial and economic crisis,’” Parker wrote. “The
district court found that the republic had sufficient funds,
including over $40 billion in foreign currency reserves, to pay
plaintiffs the judgments they are due.”

The appeals court sent the case back to Griesa to clarify
how a payment formula set by the judge is intended to work and
to determine how the orders apply to intermediary banks and
other third parties. After Griesa rules on those issues, the
case will return to the appeals court for a review of his
decisions, Parker said.

In its decision, the appeals court said the equal
treatment, or pari passu, clause in the bond agreement means
that Argentina can’t subordinate the interests of the defaulted
bondholders to those of investors who chose to participate in
debt restructurings in 2005 and 2010.

Foreign Debt

In the two offerings, Argentina restructured 91 percent of
its 2001 defaulted foreign debt, Parker said. NML and the other
investors suing Argentina were within their rights to reject the
republic’s 25-cents-on-the-dollar offers for their bonds,
according to the ruling.

The government’s dollar-denominated notes due 2015 dropped
5.11 cents, the biggest slide since June 11, to 84.96 cents on
the dollar, at 2:09 p.m. New York time. Yields jumped 2.1
percentage points to 13.62 percent, the highest level since July
31, according to data compiled by Bloomberg.

Equal Treatment

In addition to ruling on the equal treatment provision, the
appeals court rejected Argentina’s arguments that Griesa’s
injunctions violate the Foreign Sovereign Immunities Act, which
limits the ability of plaintiffs to sue foreign countries in
U.S. courts.

The appeals court said its ruling is unlikely to hamper
other countries that may try to restructure their debt in the
future. Almost all the bonds issued since January 2005 that are
covered by New York law include so-called “collective action
clauses,” provisions that allow a super-majority of bondholders
to agree on a debt restructuring that is binding on all holders,
according to the court.

The case is NML Capital Ltd. v. Republic of Argentina, 12-
00105, U.S. Court of Appeals for the Second Circuit (Manhattan).